In a recent interview, money manager Michael Pento of Pento Portfolio Strategies predicted a collapse of the global bond market and a fall in stock prices of “at least 50 percent.” He recommended gold and silver as a hedge against the coming collapse.
Pento said that Yellen and the Fed think they have solved all the problems from the Great Recession. “They believe that now. . .they can slowly raise interest rates.” He believes that this policy will “pop the bond bubble…[and]…lead to the worst recession in the history of world economics.”
The European Central Bank (ECB) announced they are going to start tapering off their $80 billion a month of easing. “You are going to see a bond market revolt,” Pento said. The free market is going to aggressively start shorting bonds, which will lead to a spike in yields in Europe, which is going to drag up bond yields across the globe. “That’s when this thing will all unravel and unravel very, very quickly,” Pento said. He foresees a bond bubble collapse and “global chaos,” based on the $230 trillion in global debt.
Pento also sees chaos coming in the currency markets. He said, “The dollar hasn’t gone anywhere but down this year, even though the Fed has announced three rate hikes.” He predicted that if the ECB raises rates, “Our dollar is going to collapse.” If the ECB starts tapering, a massive number of bonds will hit the market, which will increase rates to the European inflation rate of 2%. This process will lead to “chaos in equity prices” and “will derail the world economy,” which is based on “artificially low interest rates and debt.”
Pento believes that President Trump will “probably do an explicit default down the road,” but first he will do “what banks and central banks do best throughout history; default on debt through inflation.” He predicts the Fed will raise rates twice more this year, until the rate is about 1.75%. The economy will grind along; Q1 GDP was 0.9 percent.
We’re going to raise interest rates, flatten out the yield curve, and at that point inflation break even rates will contract. Whenever the yield curve flattens, the money supply shrinks, and we’ll have a rapid increase in real interest rates.
Then, we’ll be “right back in the middle of August 2008." The Fed then will take back their “pitiful handful of rate hikes,” which is “not going to help.” The Fed will have to “do direct purchase of assets held by the public, as Japan does; buying stocks from the public or directly buying bonds from the government.” He predicts a “massive bout of stagflation.” He pointed out that during the 1970s period of stagflation, there was “no solace in a balanced portfolio; stocks went nowhere, bond prices got crushed.”
Yellen said she would raise rates four times in 2017 and another four or five times in 2018; that did not happen. The last thing, Pento said, the Fed or President Trump wants is a strong U.S. dollar. Pento said, “The economy cannot handle aggressive rate hikes.” Such a policy would “cause a massive correction in stock prices,” which the Fed and the government do not want.
So why is the Fed raising rates? Pento said, They “want to put bullets in the chamber so they can lower interest rates when the recession hits. As long as stocks rise, they will raise interest rates.” The Fed repeatedly creates asset bubbles, piles up debt, raises rates, and then stocks, bonds, real estate, and the economy collapses. Pento said:
That’s their MO. They are going to do everything they can to rebuild the asset bubbles ... but it’s going to take a lot more than lower interest rates. They will have to have helicopter money, but only after a depression.
The recession of 2007-9 was caused by a 1% Fed funds rate for one year and a housing bubble, even when the Fed still had a 5.25% interest rate to lower. There are “far more bubbles today,” Pento said. The debt was $10 trillion, while U.S. national debt today is $20 trillion. Japan has a 250% debt to GDP ratio, an inflation target of 2% and a 0% 10-Year note. The same thing is happening in Europe and China. Pento said that China has more debt than anyone since the Great Depression. They have built huge infrastructure projects, but they are not productive, with empty roads, airports and even cities. U.S. stocks are, by almost any measure, “at all-time record highs.” “GDP has been artificially boosted by 100 months of artificially low interest rates,” and, Pento said, the Fed has “fixed absolutely nothing. They made the economy more and more artificial and more and more reliant on free money.”
Pento warned that the “deflationary collapse is coming.” He said he is buying utilities, 10% in precious metals, and shorting high yield and small cap stocks. He said, “The market is a bubble and it’s going to fall at least 50% before Yellen starts the helicopter money. You should have at least 20% to 25% that will hedge against intractable inflation or deflation as in 2008, 1987 and 1974, when the market lost a great deal of its value. “Volatility is down to single digits,” Pento said, “because everyone knows what is going to happen. The Fed gives endless free money. That is ending now. They are going to break and break hard.”
Pento said, “I believe the bond market collapse happens this year. It’s already started.” Rates are inching toward 3%. “It will invert quickly and hard. More likely it starts in Europe.” He thinks the ECB will see a bond market revolt and an aggressive shorting of bonds. The change will happen suddenly, he said. Pento recommended looking at the chart for the Greek 2-Year note in 2012, “to see how things can look calm and then boom.” The Greek note went from the low single digits to 300% in a matter of months. A similar tipping point is looming for the global economy, Pento warned.